Groundbreaking

SQUARING THE MISES CIRCLE

“Eureka! Skousen has done the impossible. Students love it! I will never go back to another textbook.”

– Professor Harry Veryser, University of Detroit-Mercy

They said it couldn’t be done. Austrian economics is so different, they said, that it couldn’t be integrated into standard “neo-classical” textbooks. Consequently, college students learn little or nothing about the great Austrian economists (Mises, Hayek, Schumpeter).

Starting with Menger’s “Theory of the Good” and the Profit-and-Loss Income Statement

Professor Mark Skousen’s Economic Logic (now in its new 5th edition) aims to change that. Based on his popular course taught at Chapman University, Columbia Business School, and other institutions, Skousen starts his “micro” section with Carl Menger’s “theory of the good” and the profit-and-loss income statement to explain the dynamics of the market process, entrepreneurship, and the advantages of saving. Business students find this approach especially valuable. After analyzing the dynamics of the P&L statement, supply and demand diagrams are introduced.

Linking Micro and Macro

Then he incorporates a simplified version of “Hayek’s Triangles,” a powerful four-stage model of the economy to link micro and macro economics for the first time. For micro, he uses Stanford Professor John Taylor’s 4-stage process of making coffee:

Figure 1. Four Stages of Production of Espresso Coffee.

Then for the macro model, Dr. Skousen uses this universal 4-stage diagram:

Notice that this Hayekian 4-stage model ties into national income accounting. GDP represents the final stage of production – the value of all finished goods and services produced in a year.

GO Behind GDP: Measuring Hayek’s Triangle

Every quarter a public-traded company releases a financial statement that includes both the “top line” (revenues/sales) and a “bottom line” (earnings, net income).

Using the 4-stage model of the economy, Skousen applies the same approach to national income accounting. Based on his work, The Structure of Production (NYU Press, 1990), he identifies gross output (GO) as the value of all 4 stages of production (#1 through #4 above) or the “top line” in national income accounting, and GDP (stage #4) as the “bottom line.”

GO is a measure of Hayek’s triangle. It adds up sales or revenues at all stages of production throughout the year, while GDP counts only final sales.

GO is a vital statistic, as it includes the value of the supply chain, all the business-to-business (B2B) transactions that move the production process toward final use. It is a measure of the “make” economy, while GDP estimates the value of the “use” economy.

In Economic Logic, GO is incorporated as a more comprehensive measure of the economy, serves as a valuable tool in analyzing the business cycle, restores the business sector as the major driver of the economy, and deserves to be updated on a quarterly basis along with GDP.

GO is now a reality. In April, 2014, the Bureau of Economic Analysis (BEA) in the Department of Commerce announced it will publish GO every quarter along with GDP. Austrian economics (Hayek’s triangles) is now officially part of macroeconomic accounting! (For Skousen’s latest press release on GO, go to www.mskousen.com.)

For the first time, the 5th edition of Economic Logic fully integrates GO in the chapters 14-15 on national income accounting and throughout the textbook. GO is presented as the top line, and GDP as the bottom line in national accounting. As economists Dale W. Jorgenson, Stephen Landefeld, and Bill Nordhaus state in their book “A New Architecture in US National Accounts,” “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Added Highlights to the 5th Edition

In addition, here’s new material found in the 5th edition:

John Mackey’s “stakeholder” model of capitalism has been incorporated into the stages-of-production process in chapter 3. Moving the production process along requires the cooperation of all economic inputs or stakeholders.

Updated discussions on job creation, the labor force participation rate, and the recovery after the Great Recession is discussed in detail in chapters 10 and 25. Chapter 10 also addresses the unemployment issues in Europe and America, and the prospects for renewed growth under a Trump administration.

Recent government regulations (Sarbanes-Oxley, Dodd-Frank, SEC) following the 2008 financial crisis and the Bernie Madoff fraud are discussed in chapter 13.

The consumption and savings rate patterns of China are compared to those of the United States in chapter 17. This comparison helps to determine what drives the economy, consumer spending or savings/investment?

The end of the Federal Reserve’s “easy money” policies of ZIRP (zero interest rate policy) and Quantitative Easing (QE) in 2017 are debated in chapter 19.

The on-going debate on “austerity” vs. “stimulus” has been added to chapter 22.

What factor is more significant in the business cycle, Keynesian lack of “aggregate demand” or Hayekian “malinvestment”? See chapter 25.

The rise of state capitalism in China is highlighted in chapter 27.

The international gold standard, the defects of central banking, and the Mises/Hayek theory of the business cycle.

A full critique of the Keynesian Aggregate Supply and Demand (AS-AD) model, and a revolutionary Austrian alternative (chapters 22 and 25). Plus a critique of Marxism and socialist central planning (chapter 27).

Economic Logic is dedicated to Friedrich Hayek and Milton Friedman, thus drawing from the best of the Austrian and Chicago schools of free-market economics.

A glossary of terms has been added to this edition.

What Economists Are Saying

“An excellent balance of theory and the real world that no other text has achieved.”

– Charles Baird, CalState East Bay

“Better than any book out there! Skousen presents real business economics in a clear, provocative and logical fashion.”

– Ian Mackechnie, University of Wales

“Perfect for any economics student — designed to maximize learning while minimizing monotony. Simple, direct, and comprehensive.”

– K. Au, home school instructor

“My college econ classes, filled with perplexing theories like the paradox of thrift, GDP and Keynesian fiscal policy, were completely refuted by this excellent free-market textbook. Students, if your professors don’t use this text, get it for yourself so you can really understand the concepts of sound economics.”

– Amazon review

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ONLY $39.95

This new 5th edition (2017) of Economic Logic is a 714-page quality paperback published by Capital Press/Regnery. It retails for $79.95, but is available at a discount — only $39.95, plus $5 shipping & handling (for all orders outside the US, add an additional $15), by calling Ensign Publishing at:

1-866-254-2057

About the Author

Mark Skousen, Ph. D., is a Presidential Professor at Chapman University, has taught economics at Columbia University, is the former president of FEE, and is the author of over 25 books, including several in Austrian economics: The Structure of Production (NYU Press); Vienna and Chicago, Friends or Foes? (Capital Press), The Making of Modern Economics (Routledge), and A Viennese Waltz Down Wall Street: Austrian Economics for Investors (LFB Books). For more information, go to www.mskousen.com.

“Mark Skousen is America’s leading economic author because he roots his luminous books in the real world. He is the Hayek of our era.” – George Gilder

Based on his popular classes at Chapman University and Columbia Business School, Professor Mark Skousen has just released the 5th edition of Economic Logic, the only “no compromise” college-level course in free-market economics.

It is uniquely based on his 40 years of experience as a CEO of several successful businesses, economic analyst for the CIA, president of a non-profit (FEE), and teacher at major colleges and universities. (He has a Ph. D. in monetary economics from George Washington U.) He is the founder of FreedomFest, “the world’s largest gathering of free minds.” Dr. Skousen was recently ranked as one of the world’s top 20 most influential economists today.

Economic Logic is divided into 28 lessons or chapters, and is used as a primary textbook in over a dozen major colleges and universities. It is designed to give you the analytical tools and market solutions to the most pressing problems facing business, government leaders, and individuals today:

Real market solutions to the Great Recession and European debt crisis (including the hidden benefits of “austerity” programs).

How John Mackey’s revolutionary “stakeholder” brand of “conscious capitalism” is destined to transform global business.

Proof that the Federal Reserve is the engine of inflation, not the defender of sound money. (And why gold will never disappear as a monetary asset.)

Why the Chinese model of state capitalism is destined to fail.

How the Austrian school of Mises and Hayek trumps the Keynesians, Chicago monetarists, and Marxists. (Each chapter highlights an influential economist).

How the welfare state violates the fundamental principles of sound economics, and how other countries have resolved the unfunded liability problem.

Why saving, technology, entrepreneurship, and business investment drive the economy — not consumer spending or government stimulus.

It introduces a major breakthrough in macroeconomics: a “top line” in national income accounting called gross output (GO), and why GDP distorts and leaves out critical information about production, consumption and investment.

A full critique of Keynesian economics and the dangers of easy-money policies.

Updates on the economics of global warming, Obamacare, and other threats to prosperity.

What Others Are Saying

“Students love it. I will never go back to another textbook.” – Prof. Harry Veryser (University of Detroit-Mercy)

From Amazon reviews: “Ground breaking….Gave me a profound new understanding of real-world economics and personal finance….Easy to read without any need for math…My college economics courses, filled with perplexing theories like the paradox of thrift, GDP and Keynesian fiscal policy, were completely refuted in this excellent free-market textbook.”

This new 5th ed. of Economic Logic is completely revised and updated, a 714-page workbook published by Capital Press/Regnery. It retails for $79.95, but you pay only $39.95, plus $5 S&H (for all orders outside the US, add an additional $15). For all credit call orders, call Ensign Publishing, toll-free 1-866-254-2057, or go to www.miracleofamerica.com.

Washington, DC (Wednesday, July 26, 2017): Gross output (GO), the top line of national accounting that measures spending at all stages of production, continued to increase much faster than GDP in the first quarter 2017, indicating a continued strong economy for 2017. Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University, states, “First quarter GO suggests that a robust economy, despite a slowdown in GDP.”

Based on data released on Friday, July 21, 2017 by the BEA and adjusted to include all sales throughout the production process, nominal adjusted GO (GO*) increased at an annualized rate of 6.0% in the first quarter of 2017, which is just slightly lower than the previous quarter’s increase of 6.2%[1]. Nominal adjusted GO for the first quarter of 2017 increased substantially faster than 3.3% GDP growth and faster than the 5.6% growth of the unadjusted GO reported by the BEA.

Real GDP, the bottom line of national income accounting, rose at an annualized rate of 1.4% in the first quarter 2017. Real GO* continues to grow much faster at a 2.5% rate.

Skousen states, “By focusing solely on final spending and the end of the economic chain, GDP can sometimes be a misleading indicator of economic performance. GO is a much better, more comprehensive view of total economic activity along the entire supply chain, and indicates a much more positive outlook.”

Moreover, according to a recent study by David Ranson, chief economist at HCWE & Co., GO anticipates changes in GDP by as much as 12 weeks in advance and thus serves as a reliable leading indicator: http://www.hcwe.com/guest/EW-0717.pdf

The Skousen B2B Index, a measure of business spending throughout the supply chain, continued growing at a brisk pace in the first quarter 2017. This continued growth indicates a sustained business activity recovery that started in the fourth quarter 2016 following the November presidential election of Donald Trump and continued through the first quarter of President Trump’s administration. In the first quarter, B2B transactions rose at an annual rate of 6.6% in nominal terms or 3.12% in real terms. Over the past two quarters – Q4 2016 and Q1 2017 – business spending increased a total of 15%. Last time that the Skousen B2B Index showed a business spending growth of 15% or more over two quarters was in the beginning of 2014.

After breaking the $40 trillion mark for the first time in the previous quarter, adjusted GO rose to $41.2 trillion and reached another first by exceeding the $41 trillion mark in the first quarter 2017. The current adj. GO is more than double the size of GDP ($19 trillion), which measures final output only.

The overall growth of GO resulted from the growth of almost all individual industries and sectors – especially industries in the early stages of production. Increased spending in the early stages, which tend to be leading economic indicators, is a good indication that the overall economy should continue expanding over the next few quarters.

Supply Chain Activity Continues Increasing

Out of the 29 Industries and sectors defined within GO, 26 sectors rose compared to the previous quarter. The mining sector followed a 30.2% annualized growth in the fourth quarter 2016 with a 62.7% boost in the first quarter 2017. However, the mining sector accounts for just 1% share of total GO, which diminishes the impact of this large increase on the overall GO. On the contrary, the manufacturing sector is almost a fifth of total GO (18% share). Therefore, the 6.3% annualized growth of the manufacturing sector has a much greater positive impact on the total GO. With a 9.6% annualized growth rate, non-durable goods outpaced durable goods, which rose at 4%.

Another sector with an 18% share of GO is the finance, insurance, real estate, rental and leasing sector. In the first quarter, this sector grew at a 6.7% annualized rate in nominal terms, which is 71% higher than the 4% increase in the fourth quarter 2016. The real estate, rental and leasing subsector, which accounts for 11.4% of total GO by itself, rose 5.6%

Compared to the previous quarter, spending fell in only three sectors. The largest drop of 12.7% is in the utilities sector. The arts, entertainment & recreation sector is down 3.6% and management of companies and enterprises fell 1.8%. However, these three sectors combined account for just 4.1% share of the total GO. Therefore, the negative performance of these few sectors could not dampen the continued growth of the GO overall.
Total government spending (11% share of total GO) increased 3% in the first quarter. While that growth rate is not particularly high, it is 50% higher than the previous quarter’s growth rate of 2%. The federal government grew at an annualized rate of only 0.5% in nominal terms and state and local government grew at a significantly higher rate of 4.1%.

Gross output (GO) and GDP are complementary statistics in national income accounting. GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

Gross domestic product (GDP) is an attempt to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government. GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. The fact that the adjusted GO continued to grow faster than GDP is a positive sign.

Business Spending (B2B) Grows Faster Than Consumer Spending

We have also created a new business-to-business (B2B) index based on GO data. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity increased 7.7% to $23.75 trillion. Meanwhile, consumer spending rose to $13.1 trillion in the first quarter, which is equivalent to a 3.4% annualized growth rate. In real terms, B2B activity rose at an annualized rate of 4.2% and consumer spending rose 1.5%.

“B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain,” stated Skousen. “There is no doubt that business activity has picked up in expectation of pro-business legislation in 2017.”

About GO and B2B Index

Skousen champions Gross Output as a more comprehensive measure of economic activity. “GDP leaves out the supply chain and business to business transactions in the production of intermediate inputs,” he notes. “That’s a big part of the economy. GO includes B2B activity that is vital to the production process. No one should ignore what is going on in the supply chain of the economy.”

Skousen first introduced Gross Output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990). A new third edition was published in late 2015, and is now available on Amazon.

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s.

With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

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[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2017 1st quarter is $33.3 trillion. By including gross sales at the wholesale and retail level, the adjusted GO is $41.2 trillion in Q1 2017. Thus, the BEA omits $7.9 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.

Washington, DC (Thursday, January 19, 2017): Gross output (GO), the top line of national income accounting, increased at a 4.6% annualized rate in the third quarter of 2016, according to data released today by the Bureau of Economic Analysis. Adjusted GO reached almost $40 trillion ($39.8 trillion) in the 3rd quarter 2016.

It is a second consecutive quarterly increase, indicating a sustained recovery as we enter 2017. Moreover, almost all of the industries, including the early stages of production, showed positive performance.

The Skousen business-to-business (B2B) Index, a measure of business spending throughout the supply chain, also increased for the second quarter in a row, after showing a decline of three consecutive quarters reversed in Q2 2016. The B2B Index change versus the prior quarter, in nominal terms, is an annualized 3.4%.

Based on data released by the BEA today and adjusted to include all sales throughout the production process, nominal adjusted GO increased 4.6% in the 3rd quarter of 2016, matches the same increase from the 2nd quarter of 2016[1]. Adjusted GO reached almost $40 trillion ($39.8 trillion) in the 3rd quarter, more than double the size of GDP ($18.65 trillion), which measures final output only. Nominal GDP, the bottom line of national income accounting, rose at a 4.4% annualized rate.

Supply chain activity varied among various sectors significantly in the 3rd quarter, but was mostly positive, especially in the early-stages of production. Mining activity reversed two quarters of double-digit declines and increased 22% in Q3 2016. Utilities managed a 25% annualized increase in the third quarter. The construction sector showed a minor Q3 increase of 2.6%. However, that is significantly better than the 7.5% decline in the second quarter.

While the manufacturing sector increased only 3.7%, it was a major contributor to positive results in Q3 because the manufacturing sector accounted for an 18% share of total GO. With a 6.9% increase and a 7% share of total GO, the finance and insurance sector was another significant contributor to overall growth.

The information sector reversed course again and increased 8.1% after a 2.3% decline of in Q2.

Professional and business services sector made a positive contribution and increased 4.4%, improving on the 3.6% growth rate from Q2. After increasing at 7.5% in Q1 and almost 10% in Q2 the Health care and social sciences sector reversed course and declined slightly by 0.4%

While the Retail sector’s increase improved on previous quarter’s performance (3.5% in Q3 vs. 1.75% in Q2), the Wholesale sector rose almost 4% reversing the 1.80% decline from the previous quarter. The positive contribution by the wholesale sector is another indicator that spending in early stages is improving.

Government spending (11% share of total GO) increased 4%, with federal spending growing a bit less (3.4%) than local government, which grew by 4.2%.

Gross output (GO) and GDP are complementary statistics in national income accounting. GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

Gross domestic product (GDP) is an attempt to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government. GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. The fact that the adjusted GO continued to grow is a positive sign.

Real Business Spending (B2B) Shows Strong Growth

We also have created a new business-to-business (B2B) index based on GO data. It measures all of the business spending in the supply chain and new private capital investment. Nominal B2B activity increased at an annualized rate of 3.4% compared to the previous quarter to reach $22.7 trillion. Meanwhile, consumer spending rose at an annualized rate of 3.6% to $12.8 trillion in Q3 2016.

“The GO data and my own B2B Index demonstrate that total US economic activity is expanding robustly,” stated Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University. “B2B spending is in fact a pretty good indicator of where the economy is heading, since it measures spending in the entire supply chain, and it indicates balanced growth at this stage.”

Skousen champions Gross Output as a more comprehensive measure of economic activity. “GDP leaves out the supply chain and business to business transactions in the production of intermediate inputs,” he notes. “That’s a big part of the economy. GO includes B2B activity that is vital to the production process. No one should ignore what is going on in the supply chain of the economy.”

Skousen first introduced Gross Output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990). A new third edition was published in late 2015, and is now available on Amazon.

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s. With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds, which is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following: Mark Skousen, “At Last, a Better Way to Economic Measure” lead editorial, Wall Street Journal, April 23, 2014: http://on.wsj.com/PsdoLM

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

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________________________________________[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2016 3rd quarter is $32.4 trillion. By including gross sales at the wholesale and retail level, the adjusted GO is $39.8 trillion in Q3 2016. Thus, the BEA omits $7.5 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.

Washington, DC (Thursday, November 3, 2016): Gross output, the top line of national income accounting, increased 1.1% in the second quarter of 2016, according to data released today by the Bureau of Economic Analysis. It is still sluggish and without indication of significant growth. While the overall economy showed signs of growth, industries in the early stages of production are struggling according to economic data released today.

The Skousen B2B Index, a measure of business spending throughout the supply chain, moved into positive territory after falling for three quarters in a row. The B2B Index change versus prior quarter in nominal term is currently at +1.1%. The small increase is a positive sign. However, unless the trend continues for the remainder of the year, the threat of a potential mild business recession still remains as we approach 2017.

Based on data released today by the BEA and adjusted to include all sales throughout the production process, nominal adjusted GO increased 1.1 % in the 2nd quarter of 2016, slightly better than the increase in the 1st quarter of 2011 (+0.3%) [1]. Adjusted GO was almost $39.5 trillion in the 2nd quarter, more than double the size of GDP ($18.45 trillion), which measures final output only. Nominal GDP, the bottom line of national income accounting, rose 0.92% in the 2nd quarter versus the previous quarter (3.7% annualized).

Supply chain activity varied among various sectors significantly in the 2nd quarter, with significant declines in early-stage production. Compared in real terms to the previous quarter, mining activity fell by another -12.6% in Q2 after declining -18.7% in Q1. The Construction sector declined -7.5% after showing a +9.4% growth in the previous quarter. The information sector also reversed course and declined -2.3% in Q2 after a 5.6 increase in Q1 2016.

The Professional, scientific, and technical services sector made a positive contribution and increased 3.6%. However, that is less than half the growth rate (+8.8%) from Q1. The sector that increased more than previous quarter was Health care and social sciences, which grew by almost 10%. This is higher by a third compared to the Q1 result of +7.5%

While the Retail sector was slightly higher (1.78%) in Q2 2016 versus the previous quarter, the Wholesale sector was down (-1.80%). This is another indicator that spending in early stages is still struggling.

Government spending (11% share of total GO) was flat (+0.13%) with federal spending growing a bit more (0.21%) than local government, which grew only 0.09%.

Gross output (GO) and Gross domestic product (GDP)are complementary statistics in national income accounting. GO is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

GDP is an attempt to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government. GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. The fact that the adjusted GO reversed course and grew faster than GDP is a positive sign. However, GO growth will have to increase significantly in upcoming quarters to suggest that the economic recovery continues into 2017.

Real Business Spending (B2B) Suffers Slight Decline

We have also created a new business-to-business (B2B) index based on GO data. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity increased 1.1% compared to the previous quarter to $22.5 billion. Meanwhile, consumer spending rose 1.6% to $12.7 billion in Q2.

“The GO data and my own B2B Index demonstrate that total US economic activity has picked up slight,” stated Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University. “B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain, and it indicates tepid growth at this stage, despite desperate efforts by the Federal Reserve and the federal government to stimulate the economy.”

Skousen champions Gross Output as a more comprehensive measure of economic activity. “GDP leaves out the supply chain and business to business transactions in the production of intermediate inputs,” he notes. “That’s a big part of the economy. GO includes B2B activity that is vital to the production process. No one should ignore what is going on in the supply chain of the economy.”

Skousen first introduced Gross Output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990). A new third edition was published in late 2015, and is now available on Amazon.

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s. With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

For More Information

The GO data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: http://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=3&isuri=1&5102=15

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations at skousenpub@gmail.com.

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[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2016 2nd quarter is $32 trillion. But by including gross sales at the wholesale and retail level, the adjusted GO is $39.5 trillion in Q2 2016. Thus, the BEA omits $7.5 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.

Today (Columbus Day) I submitted my paper “GO Beyond GDP: Introducing Gross Output as a Top-Line in National Income Accounting” to the American Economic Review. I think it appropriate to submit it on Columbus Day as I believe GO is a major discovery in national income accounting and one of the most important macroeconomic event since GDP was invented in the 1940s. I consider GO the missing piece of the macroeconomic puzzle. By including the supply chain, GO restores the importance that the business sector — the entrepreneur, the inventor and capital investment — plays in growing the economy. It debunks the idea that “consumer spending drives the economy.” It turns out that business (B2B) spending is almost double the size of consumer spending in the US, and far more cyclical.

Now, the question is, will the AER editors recognize this paradigm shift in macroeconomics? It certainly helps that the government — Bureau of Economic Analysis (BEA) — has adopted and is now publishing GO on a quarterly basis, just like GDP. It’s also being added to next edition of many of the major economics textbooks.

Top line (GO) and bottom line (GDP) in national income accounting

2016 Q1 Adjusted Gross Output (GO*) versus GDP

Here is a short summary of my paper:

Government starting measure gross output (GO): In April 2014, the Bureau of Economic Analysis began publishing a new measure of the aggregate economy called gross output (GO), the first macro measure to be released on a quarterly basis since gross domestic product (GDP) was invented in the 1940s.

What is GO? GO is a broader measure of economic activity, adding up sales/revenues at all stages of production, and serves as a complement to GDP.

The BEA now defines GDP in terms of GO minus intermediate production. GO attempts to measure the production process or the “make” economy while GDP is a measure of final goods and services, or the “use” economy.

New top line in national income account: I make the case that GO and GDP together should play a vital role in national accounting statistics, much like the top line (sales) and bottom line (earnings) in quarterly financial statements.

Top line and bottom line accounting are employed in compiling the quarterly earnings reports of publicly-traded companies.
Does consumer spending drive the economy? The media often reports that “consumer spending is two-thirds of the economy,” based on a misuse of GDP as a measure of the economy. The source of the fallacy is that GDP measures final spending only. GO is the more complete measure of total economic activity. It demonstrates that business spending is a significantly larger segment of the economy than consumer spending is. In fact, business spending (B2B) is almost double the size of consumer spending. Business spending is 60% of total economic activity, while consumer spending is only about one third (not two-thirds as normally reported).

2016 Q1 Skousen B2B Index

GO and GO by Industry may be helpful in forecasting the direction of the economy. Business spending tends to be more volatile than GDP. Earlier-stage and intermediate inputs in GO may also be helpful in forecasting the direction of economic growth.

In this paper, I argue that gross output should be the starting point of national income accounting. GO is also more highly correlated with leading macroeconomic indicators of the business cycle than GDP is and is, additionally, more intellectually consistent with the economy-wide growth at all stages of production and distribution that growth theory attempts to model.

What Others are Saying about Gross Output

and “The Structure of Production”

Financial Media

“This is a great leap forward in national accounting. Gross Output, long advocated by Mark Skousen, will have a profound and manifestly positive impact on economic policy.”– Steve Forbes, Forbes magazine (2014)

“Economist Mark Skousen can be credited with pioneering the concept of gross output in his 1990 book, The Structure of Production. Among other things, Skousen notes that GO acts as a more sensitive seismograph in registering the shock of business cycles.”– Gene Epstein, Economics Editor, Barron’s

“The next economics will have to be centered on supply and the factors of production rather than being functions of demand. I’ve read Mark Skousen’s monumental book twice, and it comes the closest to achieving this goal.”– Peter F. Drucker, Claremont Graduate University

“National income accounting has long been unfathomably flawed and worse by the decade but Mark Skousen’s introduction of gross output (GO) has been a big step forward in portraying a more total picture of the economy and where and when it’s vulnerable. Kudos to Mark for it being adopted.”– Ken Fisher, CEO, Fisher Investments, Forbes columnist

“GO is better correlated with financial-price movements than most of the other indicators. It tends to portray the economy as more cyclical than real GDP does, the recession of 2008-09 as deeper, and the recovery as slower. The universal use of real GDP as a measure of the economy’s vitality is subject to misunderstandings, pitfalls and criticism — especially in the short run. GDP includes only ‘final’ goods and services, leaving out the huge economy that consists of businesses buying and selling intermediate goods to one another.”– David Ranson, chief economist, H. C. Wainwright Economics.

Government Officials

“Gross Output provides an important new perspective on the economy and a powerful new set of tools of analysis, one that is closer to the way many businesses see themselves.”– Steve Landefeld, director, Bureau of Economic Analysis (2014)

Academic Economists

“Now, it’s official. With Gross Output (GO), the U.S. government will provide official data on the supply side of the economy and its structure. How did this counter revolution come about? There have been many counter revolutionaries, but one stands out: Mark Skousen of Chapman University. Skousen’s book The Structure of Production, which was first published in 1990, backed his advocacy with heavy artillery. Indeed, it is Skousen who is, in part, responsible for the government’s move to provide a clearer, more comprehensive picture of the economy, with GO.”– Steve H. Hanke, Johns Hopkins University (2014)

“Congratulations on your work. It has been a long slog to get the national accounts to introduce innovative measures, and Steve Landefeld [long-time director of the BEA] has been a superstar in this respect… This will open up the potential for new insights into the behavior of the economy.”– William D. Nordhaus, Yale University

“The more data the better, and your GO gives us valuable extra information. I wish you all the best with your new top-line measure of the economy.”– Jeremy Siegel, Wharton School of Finance, University of Pennsylvania

“The development of Gross Output is a good idea and a better measure [of economic activity] than GDP.”– David Colander, Eastern Economic Journal (2014)

“I am enormously impressed with the care and integrity which Skousen has accomplished his work.”– Israel Kirzner, New York University

“The two most important works on ‘Austrian’ capital theory since Hayek’s winning of the Nobel Prize are Roger Garrison’s Time and Money and Mark Skousen’s Structure of Production. All members of the Austrian School should take his book seriously.”– Richard Ebeling, Northwood University

“I’m a big fan of GO.”– Garrett Jones, George Mason University

“A good idea!”– Alan Blinder (Princeton University)

“Skousen’s Structure of Production should be a required text at our leading universities.”– John O. Whitney, Emeritus Professor in Management Practice, Columbia University

Washington, DC (Thursday, July 21, 2016): U. S. economic activity is still sluggish and without indication of significant growth. Economic data released today indicates that industries in the early stages of production are struggling, which could spell trouble for consumer spending in the upcoming months.

Gross output (GO), the new measure of total U. S. economic activity published by the Bureau of Economic Analysis, showed that spending throughout the economy held steady in the 1st quarter of 2016, only marginally increasing versus the 4th quarter of 2015 — 0.8% on an annualized basis. The Skousen B2B Index — a measure of business spending throughout the supply chain — has now fallen three quarters in a row. The B2B Index change versus prior quarter in nominal term is currently at -1.6% — its lowest level since the 2008 recession. Both data suggest continued lethargic growth of the economy and a potential mild business recession as we enter the second half of 2016.

Based on data released today by the BEA and adjusted to include all sales throughout the production process, nominal GO increased only 0.8% in the 1st quarter of 2016, slightly better than the small decline in the 4th quarter of 2015 (-0.6%)[1]. Adjusted GO was almost $39.0 trillion in the 1st quarter, more than double the size of GDP ($18.2 trillion), which measures final output only. Nominal GDP actually rose 1.4% in the 1st quarter.

While the GDP Price index continued to increase, the GO Price Index fell to a level not seen since Q2 2013. Therefore, in real terms, the adjusted GO growth rate (+0.8%) was slightly higher than the GDP real growth rate (+0.5%)

Supply chain activity varied among various sectors significantly in the 1st quarter, with significant declines in early-stage production. Compared in nominal terms to the previous quarter, mining activity continued to fall by 19.6%. The only exception among early stages was construction, which grew by 3.42%. However, since construction accounts for mere 4% share of total GO, it was not enough to offset other losses in the early stages of production. While manufacturing declined only 1.84%, it accounts for 18% share of total GO. Therefore, manufacturing had more than twice the impact of construction but in the opposite direction. Some gains were achieved in Professional and business services (+2.05%) and Health care and social assistance (2.2%), with remaining sectors without major change versus the previous quarter. While the wholesale sector was down (-1.75%), the retail sector was slightly higher (1.6%) in Q1 2016 versus the previous quarter. Government spending (11% share of total GO) was flat (+0.12%) with federal spending declining slightly (-0.12%), while state and local government spending increased 0.24%.

GO and GDP are complementary statistics in national income accounting. Gross output (GO) is an attempt to measure the “make” economy; i.e., total economic activity at all stages of production, similar to the “top line” (revenues/sales) of a financial accounting statement. In April 2014, the BEA began to measure GO on a quarterly basis along with GDP.

Gross domestic product (GDP) is an attempt to measure the “use” economy, i.e., the value of finished goods and services ready to be used by consumers, business and government. GDP is similar to the “bottom line” (gross profits) of an accounting statement, which determined the “value added” or the value of final use.

GO tends to be more sensitive to the business cycle, and more volatile, than GDP. During the financial crisis of 2008-09, GO fell much faster than GDP, and afterwards, recovered more quickly than GDP. Still, it wasn’t until late 2013 that GO fully recovered from its peak in 2007. The fact that the adjusted GO is still declining faster than GDP growth suggests that the economic recovery is remaining sluggish as we enter the second half of 2016.

Real Business Spending (B2B) Suffers Slight Decline

We have also created a new business-to-business (B2B) index based on GO data. It measures all the business spending in the supply chain and new private capital investment. Nominal B2B activity fell 1.6% from the previous quarter to $22.3 trillion. Meanwhile, consumer spending rose 0.4% to $12.5 trillion in Q1.

“The GO data and my own B2B Index demonstrate that total US economic activity has slowed dramatically. While the ‘use’ economy (GDP) is growing slightly, the ‘make’ economy (GO) is in recession,” stated Mark Skousen, editor of Forecasts & Strategies and a Presidential Fellow at Chapman University. “B2B spending is in fact a pretty good indicator of where the economy is headed, since it measures spending in the entire supply chain, and it indicates tepid growth and maybe even a downturn.”

Skousen champions Gross Output as a more comprehensive measure of economic activity. “GDP leaves out the supply chain and business to business transactions in the production of intermediate inputs,” he notes. “That’s a big part of the economy. GO includes B2B activity that is vital to the production process. No one should ignore what is going on in the supply chain of the economy.”

Skousen first introduced Gross Output as a macroeconomic tool in his work The Structure of Production (New York University Press, 1990). A new third edition was published in late 2015, and is now available on Amazon.

The BEA’s decision in 2014 to publish GO on a quarterly basis in its “GDP by Industry” data is a major achievement in national income accounting. GO is the first output statistic to be published on a quarterly basis since GDP was invented in the 1940s. With GO and GDP being produced on a timely basis, the federal government now offers a complete system of accounts. As Dale Jorgenson, Steve Landefeld, and William Nordhaus conclude in their book, A New Architecture for the U. S. National Accounts, “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”

Skousen adds, “Gross Output and GDP are complementary aspects of the economy, but GO does a better job of measuring total economic activity and the business cycle, and demonstrates that business spending is more significant than consumer spending,” he says. “By using GO data, we see that consumer spending is actually only about a third of economic activity, not two-thirds that is often reported by the media. As the chart above demonstrates, business spending is in fact almost twice the size of consumer spending in the US economy.”

The GO data released by the BEA can be found at www.bea.gov under “Quarterly GDP by Industry.” Click on interactive tables “GDP by Industry” and go to “Gross Output by Industry.” Or go to this link directly: http://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=3&isuri=1&5102=15

For more information on Gross Output (GO), the Skousen B2B Index, and their relationship to GDP, see the following:

To interview Dr. Mark Skousen on this press release, contact him at mskousen@chapman.edu, or Ned Piplovic, Media Relations, 1-201-788-6623, or email him at skousenpub@gmail.com.

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[1] The BEA currently uses a limited measure of total sales of goods and services in the production process. Once products are fabricated and packaged at the manufacturing stage, the BEA’s GO only adds “net” sales at the wholesale and retail level. Its official GO for the 2016 1st quarter is $31.6 trillion. But by including gross sales at the wholesale and retail level, the adjusted GO is $39.0 trillion at the beginning of 2016. Thus, the BEA omits $7.5 trillion in business-to-business (B2B) transactions in its GO statistics. We include them as a legitimate economic activity that should be accounted for in GO, which we call Adjusted GO. See the new introduction to Mark Skousen, The Structure of Production, 3rd ed. (New York University Press, 2015), pp. xv-xvi.

“In the fourth year of Franklin’s administration, [the Post Office] paid a profit for the first time in its history.” — Thomas Fleming, “The Man Who Dared the Lightning” (1970)

“No one man before him had ever done so much to draw the scattered colonies together.” — Carl Van Buren, “Benjamin Franklin” (1938)

Despite mammoth efforts to increase revenues and productivity, the U. S. Postal Service has failed to make a profit in years. In fact, this year it’s expected to run a deficit of over $5 billion. The difference is made up by the Treasury — that is, the American taxpayer.

Benjamin Franklin faced a similar challenge when he was made America’s first postmaster general in 1753. Within four years, he reformed the Crown’s mail service from an unreliable, expensive and unprofitable service to an efficient, dependable and rewarding operation. And in doing so he helped make the 13 colonies come together as a nation. What was his secret, and what we learn from his experience today?

First, some background: The colonial post office was run by the British Crown, which appointed local postmasters. The royal mail was expensive, slow, erratic and limited to major towns. It was discriminatory — government officials like the Penns had the franking privilege (free mailing service). So did the local printers like Franklin, who was appointed postmaster of Philadelphia in 1737. Their newspapers could be circulated for free. And mailing letters was expensive, limiting its use to the wealthy, businessmen and lawyers. Few colonists could afford to mail letters through the official royal mail. Finally, mail delivery was slow. A letter from Boston to Philadelphia might take six weeks to arrive. There was no centralized network to transport mail.

How Franklin Reformed the Royal Post

How did Franklin transform the post office? First, he lobbied for the job, and won it because for 16 years he ran the post office in Philadelphia. His experience paid off.

His first action was to make a grand tour of the postal service. Like a true scientist, he felt is essential to have firsthand knowledge of the mail system, and within a few months after his appointment, he went on a ten-week inspection tour of New England from New Jersey to Massachusetts, to determine the problems facing the post office (poor roads, bad record keeping, etc.). He talked face to face with riders and postmasters, responding to suggestions and improvements.

After his grand tour, Franklin immediately went to work. On the post roads, he had milestones erected to help riders pace themselves better. (These milestones still exist between Boston and New York.) After consulting with local postal workers, he suggested new roads, fords and ferries to deliver the mail faster and more regularly. As a result, he was able to reduce the travel time for mail between Boston and Philadelphia from six weeks to three. Within a year, he had cut the delivery time of a letter between Philadelphia and New York to one day.

Franklin insisted on precise record keeping. When he started working for Andrew Bradford, who published the town’s only newspaper, he noticed Bradford was irregular in his accounts. To deal with this problem, he furnished a uniform system of accounts to all postmasters throughout the colonies, and insisted that all postmasters keep precise accounts of their revenues and costs.

In his old newspaper the Gazette, he had for years printed the names of persons who had letters waiting for them, and introduced this practice in other post offices. Too often, letters were allowed to lie around or read by friends. Franklin discontinued the practice in Philadelphia, and imposed the same regulation in the rest of the colonies.

He also introduced home delivery and the penny post. If individuals failed to pick up a letter after their names were published in the newspaper, letters would be sent the next day for an additional fee. Franklin encouraged the same local delivery in other large towns. Unclaimed letters after three months were forwarded to the central office in Philadelphia. Thus Franklin has another claim: inventor of the dead letter office!

Franklin also made the post office egalitarian. He reduced the price and expanded the service for all colonists, not just the wealthy or important people. He abolished the monopolistic practice of allowing local postmasters to distribute newspapers for free, and opened the service to all papers for a small fee. Franklin was never one to maintain monopoly power. For example, he never trademarked any of his inventions. He thought they should be made available to everyone for their benefit, whether it be the Franklin stove, the lightning rod, or bi-focals.

All these improvements in the postal system under Franklin cost money. It cost him and his partner, William Hunter, a great deal, and they incurred £900 over their first four years. But by the fourth year they collected more money in twelve months than it had in the previous thirty-six, earning a profit of £300 a year apiece. It remained profitable until the Revolutionary War broke out.

In three years, the colonial postal service was completely overhauled, and its new speed and reliability made it profitable and popular with the people. As biographer Carl Van Buren concluded, “No one man before him had ever done so much to draw the scattered colonies together.”

On this 4th of July, it is entirely appropriate to remember Benjamin Franklin as the father of American capitalism. The post office has honored Franklin with his image on more stamps than any other person other than George Washington.

Washington and Franklin on the 100th anniversary of stamp collecting

In celebration of Franklin’s contribution to the postal service, I recommend that the Post Office issue a permanent one-cent stamp with his image on it, and the words, “A penny saved is a penny earned.”

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